Today, we’re diving into the five essential sources of money for real estate investing. Whether you’re a seasoned investor or just starting, understanding these funding options is crucial for success.
1. Hard Money Loans
Hard money loans are funds borrowed from individuals or groups, often through corporate entities that specialize in lending for real estate investments. These lenders evaluate deals or investors to loan out money. When I started, interest rates were as high as 13-16%, with points on top. Today’s rates might differ, so it’s essential to check with local hard money lenders, often found through Real Estate Investor Associations.
2. Private Money
Private money isn’t something you can find on a website like “privatemoney.com.” These funds typically come from individuals who want to invest in real estate but don’t want the hassle of managing the property. They prefer to earn a return on their investment passively. Private money lenders tend to be less expensive in terms of points and interest, making them valuable partners as you build relationships in the industry.
3. Institutional Loans
Standard institutional loans, like those from Fannie Mae or Freddie Mac, are popular but come with limitations. For instance, you can only hold up to 10 mortgages before they stop lending to you in this manner. Additionally, these loans are designed for individuals, not entities like LLCs. If you’re buying in an LLC’s name, this loan type might not work for you. Strategies exist to work around these limitations, but that’s for another discussion.
4. DSCR Loans (Debt Service Coverage Ratio)
Once you’ve maxed out your institutional loans, you might consider DSCR loans, which are more commercial in nature. These loans are typically made to LLCs or other entities. Lenders look at your real estate investing experience and the cash flow the property will generate, whether it’s a short-term or long-term rental. They also consider the debt service ratio—whether the property makes enough money to cover the risk. DSCR loans might require a larger down payment, but they offer more flexibility for investors. (See Related Article: What is a DSCR Loan?)
5. Creative Financing Options
The final category is creative financing, which includes various methods such as home equity lines of credit, owner financing, and the BRRR method (Buy, Rehab, Rent, Refinance, Repeat). For example, you could use the equity in your paid-off personal home to purchase a smaller investment property. Owner financing allows you to negotiate directly with the seller, often with flexible terms like a one to five-year note, which can be set on a 30-year payment scale with a balloon payment. The BRRR method lets you recycle your capital by refinancing after rehabbing a property, enabling you to move on to your next investment.
Conclusion
In summary, the five key sources of money for real estate investing are:
1. Hard Money Loans
2. Private Money
3. Institutional Loans
4. DSCR Loans
5. Creative Financing Options
Understanding and leveraging these sources can help you secure the funding needed for your real estate ventures.
If you have more questions about loans or need assistance in choosing the best option for your real estate investments, feel free to reach out at (678) 389-3887 or email us at [email protected]. Stay tuned for more informative content, and don’t forget to subscribe to our blog for updates and tips on navigating the world of real estate financing. Thanks for reading!
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